India Unveils New Offset Rules

India will penalize foreign military firms that fail to fulfill their defense offset requirements within the set time frame under revised guidelines.

According to the amended defense offset policy, the “overall cap on penalty will be 20% of the total offset obligations during the period of the main procurement contract,” a defense official says. But there will be “no cap on penalty” if an international vendor falls short of meeting its obligations within two years of the main procurement contract, he adds.

The current rules require any foreign vendor receiving an Indian defense deal worth more than 3 billion rupees ($53 million) to reinvest 30% of the value into the country’s industry.

Numerous amended rules, approved by Defense Minister A.K. Antony at a Defense Acquisition Council (DAC) meeting on July 23, went into effect Aug. 2.

Other revisions will affect transfer of technology (ToT), technology acquisition, the period of implementing offsets, the role of defense public sector undertakings (DPSUs) and co-production and co-development of technology.

Under the new policy, a technology transfer should be provided without a license fee and no restrictions on domestic production, sale or export.

“The offset credit for ToT shall be 10% of the value of buyback by the original equipment manufacturer (OEM) during the period of the offset contract, to the extent of value addition in India,” the official says.

The new policy will also enable capacity building for a host of technologies, research and development, army and air force centers, naval aircraft yards and training in defense laboratories.

“Technology acquisition by DRDO [Defense Research and Development Organization] for a list of specified technologies will be treated as an eligible offset with a multiplier up to three,” the defense official says.

Tier-l sub-vendors under main procurement contracts will also be allowed to discharge part of their offset obligations on behalf of main vendors. But the overall responsibility for fulfilling offset obligations will still rest with the main vendor.

Work by government-recognized R&D facilities is included on the list of eligible services for offset credits.

“This will facilitate R&D collaboration as well as direct purchase and export of R&D services related to eligible defense products from both public sector and private sector enterprises,” the defense official says.

In exceptional cases, a change in offset partners or offset components may be permitted, provided the value of the obligations remains unchanged. This will provide greater flexibility in implementation, the official said.

Roughly $3.4 billion of those deals were for aircraft, radars, drones and other systems for the Indian air force. Naval contracts worth $843 million were approved for fleet tankers, maritime reconnaissance aircraft, radars and UAVs.

India has attracted more than $4.2 billion in defense offsets since 2007.